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Russell Advocaten B.V.
Amsterdam, Netherlands

Many lease agreements include a pre-emption right. What does this mean exactly and where does this right apply or lapse?

Pre-emption right

A pre-emption right – also known as right of first offer – in a lease agreement means that the lessee will be the first to get the opportunity to buy in the event the lessor sells the property. This obligation to offer the property first to the lessee only applies at the time the lessor actually intends to sell it. Before that time the pre-emption right is of no use to the lessee. If the lessee turns down the offer, the lessor is (in principle) free to sell the property to a third party.

Purchase option

The pre-emption right is not to be confused with a purchase option which is a much stronger right and sometimes also included in lease agreements. The purchase option is an irrevocable offer of the lessor to the lessee in itself, i.e. the buyer just has to agree – say “yes” - to conclude the purchase agreement.

Pre-emption clause

In practice, the wording of the pre-emption clause often varies in length from a few sentences to one or two pages. The risk with the short versions is that the stipulations are formulated too unclear or vaguely and thus create problems when the property has already been sold to a third party. In any case, when establishing the pre-emption right, it is important that the parties make arrangements regarding the following:

  • how the purchase price will be determined

  • the period within which the offer must be accepted

  • whether acceptance subject to financing being arranged and/or other conditions are permitted

  • reinstatement of the pre-emption right if the lessor intends to offer the property against conditions which are more favourable to the buyer

Purchase price

In a pre-emption right the purchase price can be determined in advance, but that is not necessary. Frequently, parties agree that the purchase price will be determined by three (independent) experts (usually appraisers) or the purchase price will be determined at the annual lease multiplied by a certain factor.

Financing arrangement clause

A financing arrangement clause can be agreed upon in a pre-emption right too. If the lease agreement does not provide the opportunity to accept the offer subject to financing being arranged and the lessee then accepts the pre-emption right subject to financing being arranged, due to this condition the offer by the seller has not been accepted yet. This is because offer and acceptance differ from one another. The question is, whether the lessor is prepared to accept subject to financing being arranged.

If the agreement is that the lessor should “offer the rented property stating a sales price that is in conformity with the market and other conditions” it will be possible to accept the offer subject to financing being arranged, provided that it is normal market practice to accept subject to financing being arranged. The “other conditions” must also correspond to what is customary in the market.

Re-offer

In the pre-emption right can be agreed that the lessor is not allowed to offer the property to third parties against more favourable conditions than to the lessee. In this event, the lessor must re-offer the property first to the lessee before offering it against more favourable conditions to a third party. This prevents the lessor from circumventing the pre-emption right by offering it to the lessee at an inflated price and then selling it to a third party at a lower price – but which is higher than the lessee’s counteroffer.

Change of owners

Property transfer

Starting point in rent law is that in a sale the obligations of the (former) lessor will be transferred to the new lessor, popularly known as “rent agreements are not terminated by sale”. However, this only applies to stipulations that are directly linked to the use of the leased property against compensation paid by the lessee. In principle, this does not include the pre-emption right, thus the obligation to offer is not transferred to the new owner.

There is one exception though: If the lessee can demonstrate that he makes a specific payment in anticipation of a later realization of the agreed upon pre-emption right. This is the case, for instance, in the event of rent-to-purchase, the rent then also includes instalments of the purchase price.

Share transfer

It is possible that not a property is sold but the shares of the legal person who owns the property. The pre-emption right applies (in principle) to the property and not to the sale of shares. However, in a lease agreement can be included that the scope of the pre-emption right exceeds the sale of the property alone. In order to prevent a discussion about the scope of pre-emption right, it is advisable to provide for the sale of shares in a pre-emption clause.

Violation of a pre-emption right

If the lessee’s pre-emption right has been violated, he can claim fulfilment or compensation from the original owner.

Fulfilment of the obligation to offer is only possible as long as the property has not been sold. For instance, when the lessee notices that the lessor has not made an offer but negotiates with a third party. The lessee can invoke the pre-emption right and claim from that the lessor to make an offer and first enter into negotiations with him regarding the sale.

When a third party was given possession of the property, the lessee can only claim compensation from the former lessor because the original lessor cannot fulfil its obligation to offer anymore. However, the lessee has to demonstrate that he was able to exercise his pre-emption right and that he has suffered damage due to the lessor’s non-performance of the obligation to offer.

Under certain circumstances the lessee also has a claim against the third party and may even claim that the third party has to offer the property to the lessee for the market value. This is subject to high requirements though. For example, the third party must not only have been aware of the existence of a pre-emption right but must also have stimulated the lessor explicitly to ignore that right.

Our advice

  • Formulate a pre-emption right in detail.

  • Record how the purchase price is determined.

  • Prevent circumvention of the pre-emption right.

More information?

Would you like to learn more about the pre-emption right? Do you want us to draft a pre-emption clause? Please contact us: